In the world of commercial real estate, leases primarily fall into one of two groups–a net lease or a gross lease. A gross lease is a contract that includes a predetermined rental rate regardless of the cost of additional property expenses. In contrast, a net lease, a popular form of commercial leases, requires the tenant to pay the rental rate in addition to a portion or all of the expenses associated with operating the property. Specific pass-through provisions can exist in commercial net leases to streamline this process. Here is everything you should know about leases containing pass-through components.
What is a pass-through lease?
A pass-through lease is a contract where specified operating expenses “pass through” from the landlord to the tenant. These additional expenses can include any combination of property taxes, insurance, maintenance, repairs and utilities. Pass-through leases can be found in both single-tenant and multi-tenant buildings. If one tenant is leasing the entire building, the additional financial responsibilities typically include the maintenance and care of the landscaping and exterior upkeep. In multi-tenant buildings, tenants only pay these additional expenses in proportion to their usage of them.
What does a pass-through lease mean for the tenant?
While a pass-through lease requires the tenant to assume more financial responsibility, it also allows the tenant to gain more freedom and control over operational costs that affect their business directly. Smart tenants know that the more financial control they have over the space their company operates in, the easier and more beneficial these expenses can be for their business. Accordingly, tenants can use the advantages of these pass-through provisions to leverage their business’s environment and rental space.
What does a pass-through lease mean for the landlord?
Pass-through leases relieve the landlord of a significant amount of financial and organizational responsibility when it comes to handling additional expenses and coordinating maintenance and repair services. Landlords generally prefer the pass-through leasing components to be as inclusive as possible because this allows the landlord to pass off almost every operating expense to the tenant.
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